Venture Associates Corp. v. Zenith Data Systems Corp.

96 F.3d 275 (7th Cir. 1996)

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Nature of the Case

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Facts

Zenith (D) owned Heathkits. Heath was losing money, and in 1990, D decided to sell it together with its related subsidiary Prokit. D hired an investment banker to find someone who would buy Heath at a price of $11 million with D suffering a loss of $6 million from the net asset value that D held Heath on the books. One of the prospects that D found was Venture Associates (P). The investment banker did not do his homework and did not conduct a credit check of P. The banker relied upon the representation by P that its most recent acquisitions had been of companies with revenues of $55 and $97 million. On May 31, 1991, P sent a letter to the banker proposing to buy Heath for $5 million in cash, a $4 million promissory note, and $2 million in preferred stock in the new company for a total of $11 million. The letter stated that this was merely a letter of intent and was not a binding obligation. However, the next paragraph in the letter stated that the letter was intended to evidence the preliminary understandings that were reached regarding the proposed transaction and the mutual intent to negotiate in good faith to enter into a definitive purchase agreement. It also stated that D agreed not to negotiate with anyone else as long as the parties continued to negotiate in good faith and not to engage in any transaction not in the ordinary course of business, which would adversely affect Heath. D was invited to sign the letter but refused and returned another letter on June 11^th to P stating that they were willing to enter into negotiations based in principle upon the terms and conditions of P’s May 31^st letter. P accepted D’s June 11^th proposal. In its prior round of appeals, P’s principal argument was that the parties’ exchange of nonidentical contract drafts during negotiation had created a binding contract on the terms of $11 million sale prices in the May 31^st letter from P to D. After the confirmatory letter of June 12, the parties negotiated for six months. At the end of that time, no contract was signed, and D broke off negotiations on the ground that P was refusing to furnish third party guarantees of its post-closing financial obligations and agree to certain post-closing price adjustments. P sued D and apparently from the comments in the casebook, there was a lot of litigation and multiple appeals.